Fed Sees Significant Downside Risks to Economy; Some Members Support More Easing

Federal Reserve officials mulled doing more to breathe life into the stagnant U.S. economic recovery at a key policy meeting earlier this month and a number of officials believe the outlook might warrant further policy accommodation, according to minutes of the meeting released on Tuesday.

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At the November 1-2 meeting, Fed policymakers also expressed support for eventually publishing a statement aimed at clarifying the central bank’s policy approach and considered tying policy to a specific target, such as nominal gross domestic product or price level. However, the Federal Open Market Committee, which is led by Chairman Ben Bernanke, decided it wasn’t a wise idea to set a target under present circumstances.

Given a recent uptick in economic indicators, FOMC members didn’t believe it was likely for the U.S. to fall into a double-dip recession. However, they did see a significant downside risk to their growth outlook, underscored by the scary sovereign debt crisis engulfing Europe.

With those conditions in mind, the minutes showed that a few policymakers believed the economic outlook might require further monetary policy easing. The Fed announced no change at that meeting, so this group was clearly a minority.

Because interest rates are already at historically low levels, the Fed doesn’t have its typical easy tool at its disposal. However, policymakers have opened the door to another round of quantitative easing, dubbed QE3, that entails buying hundreds of billions of dollars of bonds in an effort to lower rates further.

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Yet Fed officials said any additional accommodation would be more effective if the central bank also provided enhanced communications. Likewise, some officials pointed out that the current interest rate environment has hurt pension funds and the earnings of life insurers.

The markets received a fresh reminder of the tepid economic recovery earlier on Tuesday as the Commerce Department said U.S. gross domestic product rose 2% during the second quarter, down from the 2.5% increase that had been previously projected.

“The bottom line with the Fed at this point is when they embark on QE3 as the top people there seem to want it,” Peter Boockvar, managing director at Miller Tabak, wrote in a note. “Whether they couch it in future economic conditions or not, the result is still the same, printing money that they think will create a better environment for economic growth that they haven't been able to achieve yet.”

Janet Yellen, the Fed’s vice chairman, has been tasked with leading a panel to examine how to better tip investors and businesses to future central bank actions. In theory, certain economic indicators, such as GDP, would activate specific policy responses from the Fed. However, the FOMC decided this would be too difficult of a project to attempt amid the current conditions.

Under Bernanke, the Fed has moved to become more transparent, highlighted by the central bank chief holding regular press conferences. The effort marks a dramatic shift from the secretive nature of the Fed under Alan Greenspan, Bernanke’s predecessor.

The Fed minutes, which are normally released at about 2:15 p.m. ET, were announced early on Tuesday due to the apparent breaking of a press embargo.